When raising capital, those seeking investment (referred to as issuers) have to verify if an investor is “accredited” according to the Securities and Exchange Commission’s definition. An accredited investor must satisfy the definition set forth in Regulation D section 501. Individuals qualify if they have income of $200,000 a year for the last two years with the reasonable expectation of the same for the current year in which the assessment is done, and $300,000 for couples filing jointly. Individuals also qualify if they have $1 million in net worth excluding their primary residence or if they hold a Series 7, 65 or 82 license in good standing. Entities qualify if they hold $5 million or more in investments, have $5 million or more in assets or if all of their investors are accredited. And, when making investments in private securities offerings, investors attest to their accreditation. However, simply taking that attestation or certification at face value does not absolve an issuer from their responsibility to use reasonable steps to verify accreditation.
In 506(c) offerings under Regulation D, the issuer may only sell private securities to those whose accredited status has been verified, a process for which the SEC will and has scrutinized issuers to ensure compliance. Failure to comply with the accreditation verification rules can lead to enforcement proceedings and suspension of the offering by the issuer.
The Securities and Exchange Commission’s longtime stance on verifying investor accreditation is similar to the maxim Trust, but Verify. Investment documents require investors to represent their accreditation status (trust). But, the SEC requires the issuer seeking investment to take steps to confirm such investor’s representation (but verify).
Why Does This Matter?
The cost of verification can be high, placing yet another ball into the fiscal juggling act that less wealthy entities are forced to play to procure funding. For individuals, this might include reviewing W-2s, tax returns, bank and brokerage statements, credit reports, and other financial statements. For entities, it could involve reviewing organizational documents, lists of equity owners, and financial statements. This requires those intaking this information to maintain sufficient cybersecurity protocols to maintain this level of information or requires issuers to engage third parties to verify the information provided, either of which increases costs and time, of which issuers frequently have little.
What Has Changed?
Recently, for certain groups seeking investment, the verification requirement has gotten slightly easier as a result of an SEC no action letter released on March 12, 2025.
Previously, any issuer offering securities under Regulation D Rule 506(c) could engage in general solicitation or advertising only if all purchasers of the securities met a threshold for investor accreditation. Keeping with the analogy of but verify, the rules required those offering securities to take reasonable steps to verify an investor’s accreditation status. As mentioned before, the costs of these reasonable steps may be fiscally and administratively high or even prohibitive.
The no action letter, while not removing the verification ball from the juggling act, makes the ball slower, softer, and easier to catch than before. Now, anyone offering securities under Regulation D Rule 506(c) can be concluded to have taken reasonable steps if the minimum investment by such investor is $200,000 if they are an individual and $1 million for a legal entity, and the investor represents that they are accredited.
The SEC’s no action letter streamlines the verification process for certain issuers, which should lessen the fiscal burden and administrative burden on the issuers, allowing them to spend more time raising capital and less time verifying accreditation.
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